Helsingin yliopisto


Helsingin yliopiston verkkojulkaisut

Helsingin yliopisto, Helsinki 2006

Osakeperusteisten kannustinjärjestelmien verokohtelu

Ossi Haapaniemi

Väitöskirja, joulukuu 2006.
Helsingin yliopisto, oikeustieteellinen tiedekunta, julkisoikeuden laitos, Finanssioikeuden osasto.

1. Introduction

The subject of this study is the tax treatment of share-based incentive schemes. The objective of the study is to establish the tax treatment of various share-based payment instruments including, among others, stock options, stock appreciation rights (SAR's), employee offerings and restricted stocks. The study covers both the tax treatment of employees and employers. The latter is more interesting as there are no earlier studies on this subject. In addition, the IFRS 2 has required the quoted companies to recognise all share-based payments at least in their consolidated accounts as of 2005.

The approach of this study is primarily that of a traditional tax law study. The study considers primarily de lege lata treatment of share-based payment. However, especially concerning the tax deductibility of the share- based payments, the situation is also evaluated in the light of tax policy goals and has de lege ferenda considerations. The study includes also e.g. a wide accounting section and short company law and labour law sections. It has to be mentioned here that the Supreme Court (korkein oikeus) earlier this year found that also employee stock options are classified as salary under the labour law.

The arguments used in favour of the corporate tax deduction on share-based payments are widely based on the IFRS 2. For equity-settled payment transactions, the IFRS 2 requires an entity to measure the fair value of the goods or services received, and corresponding increase in equity, either directly, at the fair value of the goods and services received, or indirectly, by reference to fair value of the equity instruments granted, whichever value is more readily determinable.

2. Corporate Tax Deduction

The comparative method is used to evaluate the Finnish tax treatment especially concerning the tax deductibility of share-based payments. The countries covered in the comparison are the United States, the United Kingdom and Sweden. In each of those countries the share-based payments are generally tax-deductible. In Finland the Working Group 2005 set up by the Ministry of Finance proposed that the tax deduction on the share-based payments (other than cash payments to employees) should be totally abolished. Currently the corporate tax deduction is possible at least based on the use of old shares (in which case the tax basis of those shares is in practice deductible) or by the use of recharge by the parent company. It is, however, questionable whether the recharge based on the issue of new shares by the parent company is deductible. Just recently the Finnish Central Tax Board gave a negative advance ruling on this, but the case is now pending before the Supreme Administrative Court (korkein hallinto-oikeus). The arguments used by the Working Group were those already hammered by IASB in the past. The argument that there is no cost to the entity is unsound as every time an entity receives resources as consideration for the issue of equity instruments, there is no outflow of cash or other assets, and on every other occasion the resources received as consideration for the issue of the equity instruments are recognised in the financial statements; and the expense arises from the consumption of those resources, not from an outflow of assets.

In Finland the Supreme Administrative Court has decided that the tax basis of assets received as contribution in kind is the fair market value of those assets despite the lower value potentially recorded in the accounts under the Finnish GAAP. There is no doubt that the company is able to depreciate in taxation e.g. machines and buildings received as contribution in kind. Why the situation should be any different when share-based payments are used to acquire services instead of machines?

De lege ferenda, an answer may come from the state treasury. In Finland this is a question of billion euro which may even have reflections in the tax rates. In Finland the amount of earned income realised from employee stock options over the period of 1998-2005 was almost 4 billion euro. The tax deduction received by the employers is likely closer to zero than one billion euro which it should be. In the tax practice the corporate tax deduction has not been granted when new shares have been issued to employees e.g. based on employee stock options. However, this has never been tested in the court.

The tax deduction can easily be received by the use of stock appreciation rights or phantom shares. There are various techniques to hedge those cash payments, either economically or in accounting or both. The whole share-based incentive scheme may also be purchased from a third party outside of the corporate group. The Ministry of Finance should look what happened in the United Kingdom and in Sweden before the corporate tax deduction was allowed.

3. Tax Treatment of Employees

The taxation of restricted shares or performance shares is based on general tax rules. Based on the case-law any benefit from the subscription or purchase of shares is taxed as earned income when the subscription or purchase takes place despite any restrictions. There seems to be no differences whether those restrictions are just lock-ups or whether there is also substantial risk of forfeiture. De lege ferenda, this kind of distinction should be done as generally is the case in the United States, in the United Kingdom and in Sweden.

According to the OECD report on taxation of employee stock options in cross-border situations, the employment benefit attributable to the stock option should be attributed to services performed in a particular country in proportion of the number of days during which employment has been exercised in that country to the total number of days during the employment from which the stock option is derived has been exercised (i.e. vesting period). According to the Finnish practice based on the case-law (related to the domestic law and tax treaties), the period up to the exercise of employee options has been taken into account. Under the current situation the employees may have an opportunity to choose the most beneficial method.

The title page of the publication

Julkaisu on tekijänoikeussäännösten alainen. Teosta voi lukea ja tulostaa henkilökohtaista käyttöä varten. Käyttö kaupallisiin tarkoituksiin on kielletty.

© Helsingin yliopisto 2006

Viimeksi päivitetty 24.11.2006

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